Identifying fraud in your organisation

Aug 09, 2018
There are always red flags left behind by a fraudster. David Carson and Barry Robinson explain what red flags to look for when trying to prevent fraud in your organisation.

Throughout the numerous fraud investigations carried out, I have managed to assemble a list of common red flags. Any one of the items on the list could indicate a fraud is taking place. Identifying red flags, especially when multiple red flags appear at once, and responding appropriately can help you detect fraud earlier and, in some cases, prevent fraud from occurring altogether.

This list is not, of course, exhaustive. If one or two of these red flags are present, it may not necessarily mean that fraud is occurring, but it would be prudent for the organisation to make enquiries and understand the underlying details.

Unusually close relationship with suppliers

Employees who have unusually close personal relationships with suppliers is something to be wary of. For example, if an employee takes a holiday with a supplier. It suggests more than a business relationship.

Recurring transactions with a particular supplier for no apparent reason

A large number of transactions with a particular supplier – often when many are slightly below an employee’s authorisation limit or when the supplier or goods/services supplied are not known to finance or senior staff – should be looked into more closely.

Unprofessional “manufactured” manual invoices

Invoices that do not appear to have been generated through a computerised accounting system can sometimes be an error on the part of the employee, but sometimes can mean something more nefarious and should be flagged. It’s also important to look at the description on the invoice. Vague descriptions can be suspect. 

Common contact details and bank account numbers 

Two or more suppliers and/or employees that seemingly share contact details and/or bank account numbers is a good indication of fraud.

Lack of supporting documentation

Lack of supporting documentation for payments, especially those incurred through corporate credit cards. This risk is magnified if there is no review or oversight of the expenditure.

An overly-dominant management team

Managers with dominant personalities who are rarely questioned or are wary of questioning have more opportunity to commit fraud than other, more team-friendly managers.

Annual leave not taken

The accumulation of large amounts of annual leave coupled with reluctance to take holidays or to delegate work when away. Similarly, an employee may refuse to take sick leave when they are really sick. Doing so would heighten the risk of being caught.

Working unnecessarily long hours

Employees who routinely work excessive amounts of overtime, work weekends or work early or stay late - for no apparent reason or business need. This could be coupled with a reluctance to delegate work.

Employee lifestyle change

Individuals who appear to live beyond their means or have an unexplained lifestyle change could be defrauding the organisation.

Unavailability of original documentation

Payments to suppliers supported by photocopies instead of originals or not supported at all. Copies of documents can easily be forged or photoshopped to look genuine.

Odd transaction patterns

Transaction patterns inconsistent with overall business and industry norms. Once can be a mistake, but a pattern of odd transactions should be looked into more closely.

Weak internal control environment

Management does not emphasise the importance of strong internal controls or does not take any corrective action when problems arise that could be taken advantage of by a frauster.

Liberal accounting practices enacted by management that compromise internal controls 

Controls such as separation of duties, delegation levels or review of expenditure being ignored or modified in practice could easily lead to fraudulent actions.

David Carson is a Partner in Forensics in Deloitte. Barry Robinson is a Director in Forensics in Deloitte.